Implied growth is the yearly earnings growth that a stock’s or an index’s current PE assumes. Under the India assumptions Chart in Motion uses, a PE of 20 implies about 10% a year for 10 years. That leaves earnings about 2.6 times today’s. You can then ask a plainer question: is that much growth likely?
Why turn a PE into growth?
A PE alone is hard to judge. Implied growth turns it into a statement you can check against the business: “earnings must grow about 10% a year for a decade”.
How does the calculation work?
It is a reverse discounted cash flow (DCF). A DCF adds up all future earnings, each discounted back to today. The reverse version takes today’s price as given and solves for growth. The model has 2 stages:
- For 10 years, earnings per share grow at one steady rate. That rate is the unknown.
- After year 10, earnings grow at a slow long-run rate for ever.
Illustrative: 10 years at 10% take earnings to about 2.6 times today’s; after that they grow at the long-run rate. Discount every bar back to today and add them up: the growth rate that makes the total equal today’s price is the implied growth.
The assumptions are fixed by region:
- India: a 12% yearly required return and 4% long-run growth.
- US: a 10% yearly required return and 2% long-run growth.
For a stock, the inputs are the share price and a full year of EPS: the last reported year, or the current year once 3 of its quarters are reported. For an index, only the PE is needed.
What do different PEs imply?
Implied yearly growth, with the 10-year earnings multiple in brackets:
| PE | India: 12% return, 4% long run | US: 10% return, 2% long run |
|---|---|---|
| 10 | 0.2% (1.0x) | −1.4% (0.9x) |
| 15 | 6.0% (1.8x) | 4.3% (1.5x) |
| 20 | 10.1% (2.6x) | 8.2% (2.2x) |
| 25 | 13.2% (3.4x) | 11.3% (2.9x) |
| 30 | 15.7% (4.3x) | 13.8% (3.6x) |
| 40 | 19.7% (6.0x) | 17.7% (5.1x) |
| 50 | 22.9% (7.8x) | 20.8% (6.6x) |
The same PE implies more growth under the India assumptions, because a higher required return discounts future earnings harder. A PE of about 10 in India, or 11 in the US, implies no growth at all.
How should you read it?
- Against the past: if EPS grew 6% a year for a decade, a price implying 15% assumes a clear speed-up.
- Against forecasts, carefully: forecasts cover 1 or 2 years; implied growth covers 10.
- By the multiple: 3 times today’s earnings in 10 years is a lot for a mature business.
- By band: the app groups readings as negative, 0-5%, 5-10%, 10-15% and above 15%. Bands describe what the price assumes, not what will happen.
What are the model’s limits?
- Assumptions drive the answer: for a PE of 20 in India, an 11% required return gives 8.1%, 12% gives 10.1% and 13% gives 11.9%.
- Earnings stand in for cash: a business that must reinvest most of its profit is worth less than the sum suggests.
- The starting year matters: a cyclical company at peak earnings will look like it needs little growth.
- Some inputs have no answer: with zero or negative EPS, or a price no growth rate between −50% and +100% a year can explain, the app shows no figure.
- It is not a verdict: high implied growth does not mean overpriced; low does not mean cheap.
See it in the app
For an index, the Indices panel (Index growth and valuation on a phone) shows the PE and implied growth with its multiple, like “10.1% (2.6x in 10Y)”, beside past and forecast EPS growth and PEG. It covers broad-market and sector indices in India and the US, plus themes in India and industries in the US. For a stock, the Financials panel shows it beside the company’s EPS history and forecasts, and it is also a watchlist column, Impl Gr. More on the features page.